VAL OT:RR:CTF:VS H225295 YAG
Ms. Margaret Jones Hopson
Jackson Walker LLP
112 E. Pecan Street, Suite 2400
San Antonio, TX 78205
RE: Dutiability of commission payments; direct selling
Dear Ms. Hopson:
This is in response to your letter, dated July 3, 2012, in which you request a ruling concerning the dutiability of certain payments for services provided by [***] (the “Importer’s”) sales consultants in the United States.
You have asked that certain information submitted in connection with this ruling be treated as confidential. Inasmuch as this request conforms to the requirements of 19 CFR §177.2(b)(7), the request for confidentiality is approved. The information contained within brackets and all attachments to this ruling request, forwarded to our office, will not be released to the public and will be withheld from published versions of this ruling.
FACTS:
On February 22, 2012, U.S. Customs and Border Protection (“CBP”) issued Headquarters Ruling Letter (“HRL”) H189369 to [***] (the “Seller”). In HRL H189369, the Seller in Canada was a non-resident importer of a variety of environmentally friendly cleaning and personal care products into the United States for sale to unrelated customers. The Seller primarily sold products to the buyers in the United States through home presentations organized by the Seller’s consultants who obtained orders, received products, and arranged for payment from the customers and hosts/hostesses who helped the selling process by hosting parties in their homes. The products were sold to customers at the party based on the established catalogue price plus shipping and handling fees, and applicable taxes. When the Seller received the order from the consultant, it invoiced the consultant and then shipped the product to the consultant, the hostess, or directly to the customer. The customers made payments by cash, check, or credit card. For cash and check payments, the consultant deducted the commission and remitted the balance to the Seller. If a customer made a credit card payment, the Seller reimbursed the commission to the sales consultant.
In HRL H189369, CBP determined that the sales consultants’ commissions were selling commissions added to the price actually paid or payable of the imported merchandise. CBP found that the sales consultants acted on behalf of the Seller and that the totality of the circumstances and the sales consultants’ actions on behalf of the Seller, such as soliciting sales at a home party, submitting orders to the Seller, and arranging payment to the Seller, indicated that the sales consultants acted as the Seller’s agents.
According to your present submission, the facts set out in HRL H189369 are no longer relevant and two scenarios apply. Under the first scenario, set out in your present ruling request and effective January 1, 2012, you state that the Importer is the buyer of the environmentally friendly cleaning and personal care products. It is claimed that the Importer purchases these products from its related party, the Seller. Subsequent to importation, the Importer sells the merchandise to the U.S. customers through its independent sales consultants also located in the United States. Under this arrangement, the products are shipped by suppliers in various countries to the Seller’s warehouse in Canada, which, in turn, redistributes goods bound to U.S. customers. The products are delivered either by the consultant to the U.S. customer or the hostess. According to your submission, when the Seller in Canada ships the orders from their facility, risk of loss and title pass from the Seller to the related Importer/Buyer in the United States once the goods are loaded on the truck. The risk of loss and title remain with the related Importer/Buyer until the products are delivered to the end customer in the United States. Even though the goods are shipped on the Seller’s account, the Importer bears the shipping and associated duties and fees via monthly reconciliation with the Seller. The Importer also recognizes the revenue on its books when the goods leave the Seller’s warehouse.
Upon request from our office, you provided the following sample documents for our review: (1) documents relating to the transaction between the Importer in the United States to the U.S. customer, including purchase order confirmation (and the corrected version of this document), the associated FedEx tracking for the shipment, commercial invoice, Importer’s collection document, Excel spreadsheet showing the payment to the Importer/Buyer from the U.S. customers, and a copy of the most recent account for the Importer, showing that the bank account to which the payments were made by the U.S. customers belongs to the Importer; and (2) a wire transfer from [***] to the Seller in Canada showing that the payments were made for the imported merchandise from the Importer’s account and an Excel spreadsheet showing the month-end reconciliation between the Seller in Canada and its related Importer/Buyer. The home party order taking, submission of orders, and facilitation of payment is all carried out by the U.S. consultants for the Importer in the United States.
Under the second scenario provided in your request, the Importer plans to establish a warehouse and distribution center in the United States. The Importer will purchase the products from its overseas supplier in a third country and store the imported merchandise in its U.S. warehouse. The risk of loss and title will pass from the overseas supplier to the related Importer/Buyer in the United States when the imported merchandise is loaded for shipment and ready for transport (FOB). Once orders from the U.S. customers are received by the Importer, the imported merchandise will be shipped from the U.S. warehouse to fulfill these orders. While it is anticipated that the home party direct sales model will continue, that is, the U.S. independent sales consultants will facilitate the sales to ultimate consumers, earning a commission on these sales, products will not be imported on an order-by-order basis. Rather, orders in the United States will be filled from the imported merchandise and stored at the Importer’s warehouse. Once imported and ordered from the existing inventory in the warehouse in the United States, the risk of loss and title will pass to the ordering consultant upon the Importer’s delivery to the carrier (in accordance with Section 10 of the U.S. Independent Sales Consultant Policies and Procedures).
Under both scenarios, the U.S. consultants operate pursuant to the Importer/Buyer’s Sales Consultant Agreement (“Consultant Agreement”), dated January 1, 2012 and the company’s Media Policy. A copy of the Consultant Agreement and the Media Policy is provided for our review. Under the Consultant Agreement, the U.S. customer provides the consultant with credit card information, and the consultant enters the credit card information and places the customer’s order on the company’s online order site. The price charged to the U.S. customer’s credit card is the full retail value of each item, including the consultant’s commission. The payment of the sales commission to the U.S. consultant is done twice a month by the Importer. The payment is made by electronic funds transfer (“EFT”) directly from the Importer/Buyer bank account held in the United States to each consultant’s personal bank account. Nevertheless, where a customer pays by cash or check, the consultant only remits the net amount due on the transaction to the Importer and retains the commission amount, which is not included in the semi-monthly commission payments.
The consultant’s commission is calculated as a percentage of a sale made by each consultant’s sales team. Every U.S. consultant earns a commission based on 35% of the retail price of items sold directly by the consultant. A document titled “Success Builder,” describing various compensation plans is provided for our review. The Importer’s sale of merchandise to the U.S. customers results in the Importer’s receiving payment for the entire sales amount from the U.S. customer. At the end of each month, a settlement is made whereby the Importer pays the Seller for the merchandise. Once a month, the Importer also pays the overseas sellers for overhead and associated services to support each month’s sales in the United States. The Importer’s payments to the Sellers under both scenarios do not include any amounts for commissions remitted to the U.S. consultants.
You seek CBP’s ruling as to whether commissions earned by independent sales consultants under both scenarios constitute additions to the price actually paid or payable. This ruling is issued pursuant to your submissions to this office, dated July 3, 2012, July 23, 2012, August 22, 2012, August 29, 2012, October 18, 2012, and November 28, 2012.
ISSUE(S):
Whether the commission payments made by the Importer to the U.S. consultants are (1) part of the price actually paid or payable; (2) an addition to the price actually paid or payable as selling commissions; or, (3) an addition to the price actually paid or payable as proceeds of subsequent resale.
LAW AND ANALYSIS:
Merchandise imported into the United States is appraised in accordance with section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (“TAA;” 19 U.S.C. §1401a). The primary basis of appraisement under the TAA is transaction value, which is defined as “the price actually paid or payable for the imported merchandise when sold for exportation to the United States,” plus certain enumerated additions thereto to the extent they are not otherwise included in the price actually paid or payable, including selling commissions incurred by the buyer and proceeds of subsequent resale of the imported merchandise. See 19 U.S.C. §1401a(b).
Bona Fide Sale
A prerequisite to finding a transaction value to be acceptable is the finding that a bona fide sale for exportation to the United States has occurred. In VWP of America, Inc. v. United States, 175 F.3d 1327 (Fed.Cir. 1999), the Court of Appeals for the Federal Circuit found that the term “sold” for purposes of 19 U.S.C. §1401a(b)(1) means a transfer of title from one party to another for consideration (citing J.L. Wood vs. United States, 62 CCPA, 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406 (1974)). Several factors may indicate whether a bona fide sale occurs between a potential buyer and seller of the imported merchandise. In determining whether property or ownership has been transferred, CBP considers whether the potential buyer has assumed the risk of loss and acquired title to the imported merchandise. In addition, CBP may examine whether the potential buyer paid for the goods and whether, in general, the roles of the parties and circumstances of the transaction indicate that the parties are functioning as buyer and seller. See HRL H092448, dated May 4, 2010; HRL H012659, dated November 14, 2007; and, HRL 548273, dated April 17, 2003.
Finally, pursuant to the CBP’s Informed Compliance Publication, entitled “Bona Fide Sales and Sales for Exportation,” CBP will consider whether the buyer provided or could provide instructions to the seller, was free to sell the transferred item at any price he or she desired, selected or could select its own downstream customers without consulting with the seller, and could order the imported merchandise and have it delivered for its own inventory.
Scenario #1
Under the first scenario described in your submission, it is claimed that the Importer sells the merchandise to the final customers in the United States through its independent sales consultants also located in the United States. Under this arrangement, the products are delivered by the Seller to the U.S. consultants, the hostess, or directly to the U.S. customers. However, you claim that the goods are first sold by the Seller to the Importer. You state that the risk of loss and title pass from the Seller in Canada to the related Importer/Buyer in the United States once the goods are loaded on the truck. The risk of loss and title remain with the related Importer/Buyer until the products are delivered to the end customer in the United States. Therefore, the second sale between the Importer and the end customers allegedly takes place when the goods are delivered to the end customer.
In your submission, dated July 23, 2012, you state that under scenario 1, there are essentially two (2) sales occurring simultaneously. Although simultaneous transfer of title or “flash title” causes CBP to more closely scrutinize the transactions to confirm that there were, in fact, two viable transactions, the simultaneous transfer of title does not by itself preclude a finding of more than one viable sale. See HRL 548526, dated January 5, 2005.
Nevertheless, in this instance, CBP cannot conclude that there is a bona fide sale for export between the Seller in Canada and the Importer in the United States. You provided some documents for our review concerning the transaction between the Importer in the United States and the end customers as well as the documents showing payments from the Importer to the Seller in Canada. However, no sample purchase orders, commercial invoices, or contracts are provided with respect to the transaction between the Seller in Canada and the Importer/Buyer in the United States, and the wire transfer between these companies is insufficient to show the bona fide sale for export. Additionally, the sample documents are silent as to the passage of title and the risk of loss between the Seller in Canada and the Importer. Thus, there is insufficient and incomplete documentation (specifically refering as to when the title and risk of loss pass from the Seller to the Importer) to show that there is a bona fide sale between the Seller and the Importer, as claimed in this ruling request. Therefore, we cannot state with certainty that there is a bona fide sale for export between the Seller in Canada and the Importer, and the simultaneous transfer of title from the Seller to the Importer and then to the end customer in the United States could indicate the existence of an agency relationship and only one viable sale between the Seller in Canada and the end customer in the United States. In light of this conclusion, we find that our ruling in HRL H189369, in which CBP determined that the sales consultants’ commissions were selling commissions added to the price actually paid or payable of the imported merchandise, is still applicable to Scenario #1.
Scenario #2
Under the second scenario, which is prospective in nature, the imported products purchased by the Importer from a related overseas supplier, would be stored in the U.S. warehouse upon importation, instead of being imported on an order-by-order basis. Thus, the Importer will deliver the imported merchandise for its own inventory. According to your submission, the risk of loss and title will pass from the overseas supplier to the related Importer/Buyer in the United States when the product is loaded for shipment and ready for transport (FOB). Once orders from the U.S. customers are received by the Importer, the imported merchandise will be shipped from the U.S. warehouse in fulfillment of these orders. Further, the Importer will be able to select its own customers in the United States via its independent sales consultants. Once imported and ordered from the existing inventory in the warehouse in the United States, the risk of loss and title will pass to the ordering consultant upon the Importer’s delivery to the carrier (in accordance with Section 10 of the U.S. Independent Sales Consultant Policies and Procedures). Since this is a prospective transaction, we are aware that the documentation necessary to substantiate a bona fide sale (such as contracts, purchase orders, invoices, etc.) might not exist at this time, therefore, provided that the Importer can present this documentation to CBP in the future, if requested, we find that there is a bona fide sale for export under the second scenario. Therefore, the remaining portion of this ruling applies to Scenario #2.
Price actually paid or payable
Once we determine that there is a bona fide sale under Scenario #2 presented by the Importer, we first consider whether the commission payments made by the Importer to the U.S. consultants are part of the price actually paid or payable.
The term “price actually paid or payable” is defined in pertinent part as “the total payment (whether direct or indirect…) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller.” 19 U.S.C. §1401a(b)(4).
Under Scenario #2, the Importer’s U.S. consultants act on behalf of the Importer by soliciting sales at a home party, submitting orders to the Importer, and arranging for payment. The price charged to the U.S. customer’s credit card by the Importer’s U.S. consultant is the full retail value of each item, including the consultant’s commission. The payment from the Importer to the U.S. consultants is made directly from the Importer/Buyer bank account held in the United States to each consultant’s personal bank account. Nevertheless, transactions occur where a consumer pays by cash or check, whereby the consultant only remits the net amount due on the transaction and retains the commission amount. Every U.S. consultant earns a commission based on 35% of the retail price of items sold directly by the consultant.
We are of the view that the payments at issue are not part of the price actually paid or payable under 19 U.S.C. §1401a(b)(4) because these commission payments are paid on the basis of the sales efforts of U.S. independent consultants after importation of the goods and on the Importer’s own account from the proceeds of its own sales to the independent consultants, regardless of whether the payments are reimbursed to the U.S. consultants separately in the case of the credit card purchase by the customers or deducted by the U.S. consultant from the full retail value of the product in the United States in the case of a cash sale.
Selling commissions
Moreover, you argue that the commissions paid to the U.S. independent consultants of the Importer are no longer selling commissions as was the case in HRL H189369 because there is a bona fide sale between the overseas Sellers and the Importer and between the Importer and the U.S. customers.
Considering the fact that there is a bona fide sale for export between the Importer and the overseas Sellers under Scenario #2, we find that the commission payments are not selling commissions. A “selling commission” is any commission paid to the seller’s agent, who is related to or controlled by, or works for or on behalf of, the manufacturer or the seller. 19 CFR §152.102(b). The statute specifies that a selling commission is one incurred by the buyer. 19 U.S.C. §1401a(b)(1)(B). Additionally, in the Informed Compliance Publication (“ICP”), entitled “Buying and Selling Commissions,” CBP defines selling commissions as fees paid to a selling agent for the services it performs on behalf of the seller in the sale of the imported goods. The seller controls the actions of the selling agent with respect to those matters entrusted to the agent. Vol. 34 Cust. Bull. No. 25, dated June 21, 2000.
Both the CBP regulations and ICP indicate that in order for a commission to be treated as a bona fide selling commission, an agency relationship between the seller and some third party who receives the payment is presupposed. See also HRL W548515, dated September 8, 2004. According to the facts of this case, the Importer is the buyer of the products under Scenario #2. Further, even though the Importer incurs the commission payments, the U.S. consultants are acting on behalf of the Importer, not the Seller in the sale of the imported goods. In other words, the U.S. consultants are carrying out all activities such as order taking, facilitation of payment, and delivery of the goods for the benefit of the Importer/Buyer, not the overseas Sellers. In this case, according to the terms of the Consulting Agreement, the U.S. consultants work for the Importer/Buyer, not the Sellers; the Sellers do not control the actions of the U.S. consultants; and, there is no agency relationship between the Seller and the U.S. consultants that receive the payments. Accordingly, we find the commission payments at issue are not additions to the price actually paid or payable as selling commissions.
Proceeds of subsequent resale
Despite having concluded that the payments at issue are not part of the price actually paid or payable and not additions to the price actually paid or payable as selling commissions, we need to determine whether these payments should be added to the price actually paid or payable as proceeds of subsequent resale under 19 U.S.C. §1401a(b)(1)(E).
Pursuant to19 U.S.C. §1401a(b)(1)(E), one of the additions to the price actually paid or payable is for “proceeds of any subsequent resale, disposal, or use of the imported merchandise that accrue, directly or indirectly, to the seller.” With regard to proceeds, the Statement of Administrative Action (“SAA”) provides that:
[a]dditions for the value of any part of the proceeds of any subsequent resale, disposal, or use of the imported merchandise that accrues directly or indirectly to the seller, do not extend to the flow of dividends or other payments from the buyer to the seller that do not directly relate to the imported merchandise. Whether an addition will be made must be determined on a case-by-case basis depending on the facts of each individual transaction.
SAA, H.R. Doc. No. 153, Pt. II, 96th Cong., 1st Sess. (1979), reprinted in Department of the Treasury, Customs Valuation under the Trade Agreements Act of 1979 at 49 (1981). See also 19 CFR §153.103(g).
CBP has ruled that in order for proceeds of a subsequent resale to be dutiable under this section, they must pertain to the resale of the imported merchandise, and they must accrue directly or indirectly to the benefit of the seller. See HRL 545035, dated August 23, 1995.
In this case, the post-importation commission payments, paid by the Importer to the independent U.S. consultants under Scenario #2 are not an addition as proceeds because (1) commission payments are not settled to the Sellers and do not accrue to the Sellers either directly or indirectly (according to the facts, the Importer’s payments to the Sellers under Scenario #2 do not include any amounts for commissions remitted to the U.S. consultants), and (2) there is no indication in this case that the Sellers under Scenario #2 receive the value of any part of the proceeds of any subsequent resale of the imported merchandise in the United States.
HOLDING:
Based on the information presented, the consultants’ commissions are neither part of the price actually paid or payable or additions to the price actually paid or payable as selling commissions, or proceeds of subsequent resale under Scenario #2. With respect to Scenario #1, presented in this ruling request, we find that our ruling in HRL H189369 applies.
Please note that 19 CFR §177.9(b)(1) provides that “[e]ach ruling letter is issued on the assumption that all of the information furnished in connection with the ruling request and incorporated in the ruling letter, either directly, by reference, or by implication, is accurate and complete in every material respect. The application of a ruling letter by a Customs Service field office to the transaction to which it is purported to relate is subject to the verification of the facts incorporated in the ruling letter, a comparison of the transaction described therein to the actual transaction, and the satisfaction of any conditions on which the ruling was based.”
Sincerely,
Monika R. Brenner, Chief
Valuation & Special Programs Branch